I found an interesting article by the national post. When reading this article keep in mind that in banking language “assets” are things that make the bank money, this means loans; whereas “liabilities” means money in the bank. This is the opposite of what most people would think.
The reason for this is, a bank is responsible for paying back the money people deposit into it, i.e. it is liable for it. When a bank loans money out, however, it makes money on the loan via interest. It is therefore considered an asset.
I will summarize the important parts of the article for you here, but I strongly suggest you read the entire thing.
Like a company, the bank has a balance sheet; assets on the one side and liabilities on the other. The majority of the bank’s liabilities are circulating notes held by the Canadian public. Pull $20 out of your wallet and you are holding not just a pretty piece of paper that buys stuff but a liability of our central bank.
[...] A liability is only as good as the asset that backs it up. The $20 you’re holding is backed by various assets held in the vaults of the Bank of Canada in Ottawa. In times past the asset side of the bank’s balance sheet had a large gold component.
[...] This has all changed. Over the last three months, the bank has sold off a large part of its government T-bill portfolio and replaced it with assets classified as “other.”
[...] For the average Canadian who holds the Bank of Canada’s cash, the move may not be in their best interests. Our central bank has swapped a sure thing; a large chunk of liquid and non-volatile AAA-rated government debt, for a slew of “other” assets whose nature remains uncertain to everyone but bank insiders, assets which are inherently more volatile and less liquid than government debt. [...] In sum, while the big banks may be happier, those dollar liabilities we all hold in our wallets don’t look so good anymore, thanks to the Bank of Canada’s massive balance sheet alteration.
[...]the Bank of Canada’s decision to lower the stability and transparency of its balance sheet may incite people to sell Bank of Canada liabilities. The result would be a drop in these liabilities’ value, which is just a different way of saying inflation, or a decline in the purchasing power of money.
Read more: http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/12/03/the-bank-of-canada-s-mystery-assets.aspx#ixzz0dZF1VZG0
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And for those of you who don’t know, inflation is another way of saying taxation without representation.
Thanks for stopping by,
-Couchconomist
